NPD - ML drops coverage
Termination of Coverage of NPD
We are terminating coverage of China Nepstar Drugstore (NPD). This reflects a
reassessment of our coverage universe. The final opinion reflects our analysis as of
the date of the Research Report and investors should not continue to rely upon
such opinions, price objective or estimates in the future.
Industry challenges remain
We believe the policy to facilitate pharmacy/ hospital separation in China should roll
out gradually in the next ten years and should benefit drug chain stores in capturing
more value in overall healthcare spending in the long term. However, such long-
term positive effect can be more than offset by negative impacts from EDL pricing,
strict guidelines on antibiotics usage and competition from community healthcare
networks.
Low near term growth visibility
NPD has had several quarters of losses and we believe the challenges will continue
in the near term 1) the business and policy environment are likely to remain
unfavorable to the drugstore industry, 2) benefits from change in product mix,
savings from closure of under-performing stores and effective cost control measures
will take several quarters to manifest, and, 3) transformation to a drugstore
convenience hybrid is a much longer term goal. Given current distort earnings, we
believe the best methodology to value the company is P/B.
